Hemisphere Media Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hemisphere Media Group Third Quarter 2015 Financial Results Conference Call. My name is Carmen and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. I would now like to turn the call over to Mr. Josh Hochberg. Please begin.

[Joshua Hochberg:]

Thank you, and good morning, everyone. I would like to welcome everybody to today’s conference call. I'm Josh Hochberg and I’m with Sloane & Company, Hemisphere’s outsider investor relations firm. Joining me on the call today is Alan Sokol, Hemisphere’s Chief Executive Officer; and Craig Fischer, Hemisphere’s Chief Financial Officer. A replay of the call will be available beginning at approximately 12

[Alan Sokol:]

Thank you, Josh. Good morning and thank you all for joining us today. Our results in the third quarter continue our strong 2015 performance with 9% net revenue growth and 7% growth in adjusted EBITDA. Year-to-date, our net revenues were up 19% and adjusted EBITDA is up 21%. We continue to experience strong growth in the third quarter in both of our revenue streams, advertising as well as subscriber and retransmission fees across all of our networks. Our results this quarter reaffirm that we are in the sweet spot of the PayTV universe. Our subscribers once again increased this year and for the first nine months of the year our overall U.S. subscriber base has grown by 8%. This is a different and much better trajectory than what we are seeing from widely distributed general market cable networks, which have generally reported decline of 1% to 2%. Given the under penetration of the U.S. Hispanic program packages and the continued robust growth in the U.S. Hispanic population, our organic subscriber growth should continue to significant outperform the overall PayTV universe. At the same time, we are extremely well positioned to target our audiences through SVOD and other digital platforms. We recently entered into our first content licensing deal with a major SVOD distributor in Latin America. Today, while we have resisted the short-term dollars from licensing our content to U.S. SVOD distributors, we are evaluating participating in new SVOD platforms and we will continue to support and encourage our MBPD partners in their over-the-top initiatives such as DISH’s Sling Latino platform. We believe that we are the gatekeepers in our content categories as the over-the-top platform is providing us with the major opportunity to build new assets to reach the approximately 34 million U.S. Hispanic who do not subscribe to this Hispanic PayTV programming package. Many of these non-subscribers are [indiscernible] whom we will have a chance to reach for the first time. Turning to our individual networks, WAPA once again delivered terrific ad revenue and retransmission fee growth. WAPA reached an all-time high in its share TV ad revenue in the third quarter, driven by its continued ratings dominance. These results are particularly impressive given the great economic uncertainties that Puerto Rico continues to confront. Although Puerto Rico faces many ongoing challenges, we are encouraged by attention that Puerto Rico has received from the Federal Government in recent weeks and the urgency with which the situation is being addressed. We believe swift action by the government should jump start investment and restore consumer confidence. Notwithstanding this challenges and uncertainties, the Puerto Rico TV ad market in third quarter showed some resiliency with the decline in mid-single-digits a sequential improvement from the second quarter results. In fact September saw modest ad revenue growth the first such growth since March 2014. We don’t want to over emphasize the single month of growth, but we are encouraged by this shift. Our U.S. cable networks all experienced strong ad revenue and subscriber fee growth this quarter. We launched advertising at Cinelatino in July a few months later than originally planned. As a result we were late to the game from much of the 2015-2016 upfront activity. While this will result in modest ad revenues this year we are confident that advertising will represent an important revenue stream in 2016 and beyond. We have received virtually no negative feedback from our viewers regarding the addition of advertising on Cinelatino. We believe this is a reflection of the modest commercial load as well as our commitment to preserving the premium viewing experience our audience have come to expect. Cinelatino continues to deliver big numbers, during the third quarter Cinelatino had 46 of the 50 highest rated programs among all non-sports channels in the Hispanic package, including all of the top 10 highest rated programs. With performance like this we are excited about the ad sales opportunity. WAPA America is also delivering impressive ratings in audience growth. In fact, during third quarter, WAPA America’s total day audience increased by 31% over third quarter 2014. WAPA America is now squarely among the highest rated Hispanic cable networks, including Discovery en Espanol, ESPN Deportes, Fox Sports en Espanol and Galavision. Our investment in programming and marketing at our newer networks is already driving stronger performance. This quarter, we launched an entirely new on air local Pasiones, which conveys a more useful and current branding message to our audience. In fact, according to Front Track, in the third quarter both Centroamerica TV and Pasiones achieved their highest viewership levels since Front Track began measuring these networks in 2011. We are encouraged by the audience advertiser and distributor responses to our investment in these networks and are confident that this increased investment will continue to drive ad revenue and subscriber growth. Latin America also continues to experience robust subscriber growth. Year-to-date Pasiones has grown subscribers by 12% and Cinelatino subscriber base has increased by 9%. On the acquisition front, we have a strong pipeline of perspective deals and are optimistic that we will identify some unique and attractive opportunities. As you can see, our business is performing exceptionally well amidst an evolving PayTV universe in the U.S. and a cloudy macroeconomic environment in Puerto Rico. Our results this quarter once again underscore the strength of our differentiated business model, the quality of our execution and the compelling opportunities ahead of us. With that, I’ll turn the call over to Craig. Thank you.

[Craig Fischer:]

Thank you, Alan and good morning, everyone. Our results reflect the inclusion of the operating results of the Acquired Cable Networks, which were acquired in April of last year. This affects the comparability of our year-to-date results, but not our quarterly results. Net revenues for the quarter was $31.5 million, an increase of 9.3% as compared to net revenues of $28.8 million to the same period in 2014. Net revenues for the year-to-date period were $93.6 million, an increase of 18.7% as compared to net revenues of $78.8 million for the same period in 2014. These increases both three and nine month periods were driven by growth in advertising revenues and higher subscriber and retransmission fees resulting from the combined effect of overall growth in subscribers and rate increases. The increase for the nine months was also due to the inclusion of the Acquired Cable Networks, which were not included in the prior year’s first quarter. The inclusion of the Acquired Cable Networks also impacts our operating expenses and adjusted EBITDA for the nine months period. While the vast majority of our revenue is sourced from the U.S., we do have some distribution deals priced in foreign currency, but then remitted in US dollars, which were affected by the appreciation of the US dollar. Excluding the effect of the currency, our revenue growth would have been 9.7% in the quarter and 19.1% in the year-to-date period. Subscriber and retransmission fees represented approximately 53% of our net revenues in the year-to-date period up from 51% in the prior year. Operating expenses for the quarter were $23.5 million, an increase of 1.3% and for the year-to-date period were $69.8 million, an increase of 10.8%. These increases for both the three and nine month periods were driven primarily by increased investment in programming at the Acquired Cable Networks and WAPA America consistent with our previously stated strategy. Additionally, operating expenses increased due to higher sales and marketing cost and continued growth in our infrastructure to support our expansion. Adjusted EBITDA was $13.7 million for the quarter, an increase of 7.2% as compared to adjusted EBITDA of $12.8 million for the same period in 2014. Adjusted EBITDA was $41.3 million year-to-date, an increase of 21.2% as compared to adjusted EBITDA of $34 million for the same period in 2014. These increases were due to growth in advertising revenues and subscriber and retransmission fees. Excluding the currency effects, adjusted EBITDA growth would have been 8.2% in the quarter and 22% in the year-to-date period. Turning to the balance sheet, as of September 30, 2015, we had $222.2 million in debt and $170.4 million of cash. Our gross leverage ratio was 3.9 times and our leverage ratio net of cash on hand was just under one turn. As we have said before, we expect to capitalize on our strong balance sheet for both organic and acquisitive growth and continue to look to uncover potential deals that will augment our leadership positions. This was a strong quarter of execution for our business and we are pleased with where we stand as we head into the fourth quarter. Accordingly, we are tightening our guidance to mid-teens, adjusted EBITDA growth for the year. We’ll now open the call to your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question is from the line of David Bank from RBC Capital Market. Your line is now open.

[David Bank:]

Okay, thanks. Good morning, guys.

[Alan Sokol:]

Good morning, David.

[David Bank:]

A couple of -- I wanted to follow-up on I think there was a comment Alan made about not getting any negative feedback on the ad ramp at Cinelatino, and the strength -- the performance has been solid. Can you comment on sort of ratings trends, has there been any delta in actual ratings? I’m assuming that’s what you are referring to, since you’ve seen the ad loads begin to ramp. And the second question is you guys have really shown some nice upside to the sub-growth at all your cable nets and but there is still a fair amount of upside I think to get to the kind of number WAPA America gets even without the sort of the digital basic subs. Can you kind of remind us of what you think the timeline is to get to close to parity with WAPA America or wherever your target is, what kind of timeframe you would take there? Thanks very much.

[Alan Sokol:]

Good morning. On Cinelatino ratings have I would say held steady and have in fact somewhat increased since we launched advertising. Part of that is we have we did save some of our stronger movies for the launch of advertising in order to drive ratings while we were launching advertising. But I would say we are very pleased with the ratings results post advertising and really see no fall off or no backlash or negative activity in any way from the introduction of the advertising and I think we’ve done it in a very subtle and non-intrusive way that really hasn’t impact of U.S. viewer experience and as I said literally we’ve gotten zero complaints. So from that perspective very positive. Regarding your other question, I would say probably Cinelatino is probably has our largest distribution today on Hispanic package somewhere in the $4.5 million range, which is pretty close to full distribution within the tier. So if you look at that sort of being the opportunity. I think in addition organic growth there are number of holes to fill in our within our distribution and I believe we will get those filled over time. We’ve done a good job to-date in getting those so those primarily related to the networks that we acquired last year. I think some of our ability to get those holes filled has been subject to some of the consolidation going on in the business and the fact that that consolidation has delayed the decision making among some of the involved distributors. But I think once kind of this consolidation gets put to bed as the new owners take over it we feel very good about the opportunity in front of us to fill those holes.

[David Bank:]

Terrific, thank you very much guys.

[Operator:]

And our next question comes from the line of Ben Mogil from Stifel. Your line is now open.

[Benjamin Mogil:]

Hi, good morning and thank you for taking my question as well. So domestically it sounds like your preference is to stay within sort of some of the bundled OTT services that are being either offered like Sling or being sort of rumored rather than I suppose with SVOD. Can you give us a sense, are you seeing a lot of activity on the bundle OTT environment front? And is your thoughts as well to offer your own standalone apps which would be sort of TV everywhere authenticated, but to also have your own separate apps to sort of continue to sort of focus on more direct to consumer relationships?

[Alan Sokol:]

I think the answer is yes. I think we are actively working in a partnership with our traditional distributors on their over the top initiatives and efforts some of which are further along than others. Dish is probably the furthest owned that actually launched and have started to market and secure customers although they are very early innings of that. I think some of the others are in consideration at some level in doing that and we’re an important party to that I mean their efforts to do that. At the same time, we’re not ignoring the opportunity for to reach those customers that are not being served or reach by traditional distribution as I said that we are a 34 million or so Hispanic through the program package does not reach today. And in regard to that we are evaluating the full spectrum of options from go on a standalone basis to partnering with other strong content owners in creating a compelling service with very robust and diverse content. And I think we’ll figure this out, I don’t feel from our side urgency to do this because I don’t feel that we need to respond to somebody who’s a first mover here, because nobody really has moved first in this space. But that said we don’t want to be reactive and we are being proactive and figuring out what strategy is best for us in regard to this.

[Benjamin Mogil:]

Okay, thank you. And then sort of the ratings front, when you look at buy at live same day L plus 3, L plus 7, are you seeing anything in terms of genres or specific channels you can call out hey this is the channel, which is doing really well now live same day this one does really well and L plus 7 kind a curious what you’re seeing on those fronts?

[Alan Sokol:]

I think the good news in this is that our audience tends to watch live. Which I think from an advertise perspective is very positive. DVR usage and indexing among our audience is significantly below that of the general market networks. So we have a much higher ratio of live or live plus same day than general market networks do. And that’s partly a function of couple of things number one, certain of our networks like WAPA America have a lot of live current programming. And as a result those it compels live viewing, WAPA America has twice as much live program as any others Spanish language network in America. So it makes it a very compelling option from a live standpoint and also as a result from an advertiser standpoint because if viewers are watching live than are fast forwarding through commercials. And then even on those networks like Cinelatino that in which you could watch on a delayed basis, viewers tend to watch live or live plus same day at a much higher ratio than they do on the English side.

[Benjamin Mogil:]

Okay, that’s great that’s very helpful thanks Alan. And then Craig I don’t want you to feel left alone in this call. On the M&A side, are you seeing I mean you obviously seeing tremendous amount of cash and you continue to generate cash. What are you seeing that’s interesting are you seeing live [indiscernible] are you seeing channels possibly pop-up kind of curious what you’re seeing on your end?

[Craig Fischer:]

Yeah we’re seeing opportunities consistent with what we’ve stated both cable networks in the U.S. and LATAM as well as broadcast opportunities in Latin America in markets that make sense for us. And we continue to look at content libraries as well and to help to populate some of the OTT strategies that we have.

[Benjamin Mogil:]

Okay, that’s great thanks again guys. Congratulations on a good quarter.

[Craig Fischer:]

Thank you.

[Operator:]

[Operator Instructions]. And your next question is from the line of Michael Morris from Guggenheim. Your line is now open.

[Michael C. Morris:]

Thank you, good morning guys. Maybe to follow-up on those 34 million potential subscribers out there, could you tell what you see in the behavior of your subscriber base, your target demo? You talked about sort of -- you talked about the 8% growth on your -- I guess within the traditional ecosystem. Are you seeing a higher rate of growth on sort of non-traditional so let’s say I don’t know like a ROKU box or something like that on the TV? Are you seeing a higher rate of growth on mobile like what do those trends look like compared to sort of the traditional subscriber growth? And then I have a follow up on ads.

[Alan Sokol:]

Hi Mike, good to talk to you. It’s an interesting question and it’s a complicated question because you can’t look at Hispanic as a mono list in the U.S., it’s 55 million plus Hispanics. Our target are Spanish dominate and bilingual Hispanics. Most of whom are still consuming media in a traditional way primarily focused on television. Mobile usage and mobile adaptation is very high overall among the Hispanic market and over indexes the overall market. Broadband on under indexes by some significant level the overall market. And that’s sort of interesting the dichotomy and I think the mobile I think that’s partly a function of the fact that the Hispanic market is so young and there are so many Hispanics under the age of 25 who are natural mobile users and natural users of new technology. However, those viewers are primarily not our audience and those that part of the audience to tend significantly over indexed on [indiscernible] in English speaking side and those viewers and that audience is consuming a lot of video and a lot of entertainment through mobile devices, through games, through tablets. But that tends not to be the audience that consumes our product.

[Michael C. Morris:]

Okay, great. That’s helpful. And then on the advertising side you spoke about the growth in September. Do you have the sort of data from October at this point to have a sense whether the trend is continuing into the fourth quarter or whether that was kind of an anomaly in the Puerto Rico market?

[Alan Sokol:]

Mike we typically don’t discuss current quarter numbers during the quarter and especially in the fourth quarter, which is seasonally our highest quarter in Puerto Rico and November and December are seasonally our highest months of the year. So they are still a story is yet to be told for fourth quarter. That said, I will say that we don’t see the trends getting any worse. We see sort of being stable with where we saw in third quarter overall to-date.

[Michael C. Morris:]

Great, thanks a lot guys.

[Operator:]

And now I would like to turn the call back to Mr. Alan Sokol for any final remarks.

[Alan Sokol:]

Nothing more from me. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.